SOME THOUGHTS ON TRAVEL AND ENTERTAINMENT
(......and it's never too late to wish you and yours the happiest of happy holidays from all of us here at Abo and Company, LLC and Abo Cipolla Financial Forensics, LLC...)
Most of Abo and Company's business owner or independent contractor clients and friends are aware of the tax rule that disallows 50% of their otherwise allowable deductions for business meals. This provision normally applies regardless of the reason for the expense - from taking clients out to dinner to paying for your meals while traveling away from home. What is not nearly as widely known is that there are several exceptions to this 50% disallowance rule. When one of these exceptions applies, you generally get a 100% deduction for the business meal expenses - which might just make even a good meal taste that much better.
How about if we were to say that 100% of the employee holiday party your business just sprung for is deductible? Yep, employers can deduct the full cost of providing food and beverages at recreational, social, or entertainment gatherings primarily for the benefit of rank and file employees (as opposed to highly compensated employees). Examples also include company outings, banquets, or other gatherings (such as the 2015 annual holiday party) for employees and their guests (even if you forgot to invite your favorite accounting firm....maybe next year).
Also, many of our clients just returned from a winter trip which, if merely a personal vacation, is clearly not deductible. Still, it did remind us to alert you that costs covering a spouse, who accompanies you on a business trip, are a favorite target of IRS auditors and you'll have to prove that the spouse had a legitimate business purpose to deduct many of the expenses. However, this would not be true with respect to costs that would have been incurred regardless of whether your spouse came along or not. Thus, the cost of a rental car would be fully deductible. Similarly, the single person occupancy cost of a hotel room would be deductible. (Often this is identical or just slightly less that when two people occupy the room.) Also, consider paying for and deducting the cost of a single airline ticket for yourself, and utilizing frequent flier miles to purchase a ticket for your spouse. Finally, if business associates invite their spouses to meals, you should be eligible to deduct the cost for yourself and your spouse with respect to those meals.
The virtually endless numbers of items that can be "business expenses" always make it difficult to list each one for you as well as separate expenses that serve a bona fide business purpose from those that do not.
Expenditures like these are usually "fact sensitive" and, therefore, such generalized advice should obviously be accompanied by our favorite piece of advice. That is, you really need to confer with your tax advisor for applicability and competent professional advice (hopefully that's Abo and Company).
Soooo...here's a quick rundown of other major exceptions to the 50% disallowance of business meals rules:
The Office Coffee Bar. Employers can deduct 100% of the cost of providing employees with free coffee, soft drinks, donuts, or similar snacks or beverages to be consumed on the business premises.
Meals Served on the Employer's Premises. In the right circumstances (which can be fairly difficult to meet), an employer may provide employees with meals at work and claim a full deduction (without the employees having to report the value of the meals in their income). The key is the meals have to be provided (a) for a valid business reason, (b) on or near your businesses premises, and (c) primarily for the convenience of the employer (rather than merely as an added fringe benefit for employees).
Items Available to the Public. Expenses incurred for meals available to the general public are 100% deductible. Examples include free food at concerts hosted by a shopping mall, free dinners for potential restaurant customers, free hot dogs at a car dealership promotion, free wine and food at an exhibition sponsored by a liquor dealer, and free cookies furnished by a realtor at an open house.
Amounts Billed to Clients. When services are provided as an independent contractor, the service provider can deduct 100% of job-related meal expenses by billing the client separately for these costs. (Obviously this isn't always practical.) The client is then stuck with the 50% disallowance rule. If separate billing doesn't occur, the 50% disallowance rule applies to the service provider.For example, many of our attorney clients adequately account for meal and entertainment expenses to a client who reimburses them for these expenses. They are not subject to the directly-related or associated test, nor are they subject to the 50% limit. If the client can deduct the expenses, that client is subject to the 50% limit.
Employee's reimbursed expenses. If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. Similar to the above, the employer can deduct the expenses although it is subject to the 50% limit.
Sale of meals or entertainment. You are not subject to the 50% limit if you actually sell meals, entertainment, goods and services, or use of facilities to the public. For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is not subject to the 50% limit.
Charity Sporting Event. The allowable deduction for the cost of a ticket to a qualifying charity sporting event isn't reduced by the 50% meal disallowance rule even when meals are included. The ticket package must include admission to the event, but it can also include meals and refreshments. To qualify, the charitable event must give 100% of its net proceeds to a charity and use volunteers to do almost all the work. The classic example is a charity golf tournament with a meal included in the deal.
Hours of Service Limitations. In lieu of the regular 50% disallowance, individuals whose work is subject to the hours of service limitations of the Department of Transportation (e.g., interstate truck drivers, certain air transportation employees, certain railroad employees) can deduct 80% of their business food and beverage expenses in 2015 and, to our knowledge this alert, in 2016.
As you can see, there are enough exceptions to the 50% disallowance rule that most businesses can meet at least one, if not more of them. To the extent your business qualifies for any of them, it's important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.